Coronavirus stimulus: Failed negotiations would force Americans 'to make devastating cuts,' experts warn

Denitsa Tsekova
·Reporter
·5 mins read

The failure to pass a bipartisan coronavirus stimulus deal before the presidential election will likely lead to a slower economic recovery and decreased spending as the savings of millions of Americans deplete.

“In October, November, unemployed families will just run out of the savings that they've been relying on and then we'll have to make devastating cuts to their spending,” Ernie Tedeschi, a managing director and policy economist for Evercore ISI, told Yahoo Money. “Burning through savings as a way of maintaining your spending is not sustainable.”

The over 26 million jobless Americans who are currently receiving unemployment insurance have already seen a drop in benefits in recent weeks — from around 130% of their pre-layoff wages to now 50% after the expiration of the extra $600 in July and the president’s Lost Wages Assistance (LWA) program, an analysis by Evercore ISI found.

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At least 38 states have paid out all their funds available under the Lost Wages Assistance (LWA) program. (David Foster/Yahoo Finance)

And while some of those unemployed Americans survived on accumulated savings over the last few weeks, much of that extra money will be exhausted in the coming weeks without more stimulus.

“More and more families are going to reach the point where they just don't have any more savings to rely on,” Tedeschi said. “If there aren't enough jobs, then they're going to be stuck with regular state unemployment insurance.”

The president recently turned down a $2.2 trillion Democratic stimulus offer, which came in the form of the updated HEROES Act that passed the House last week. House Speaker Nancy Pelosi (D-Calif.) and Treasury Secretary Steven Mnuchin have been speaking regularly in an effort to craft legislation that could pass both the Democratic-controlled House and GOP-controlled Senate.

On Thursday morning, the president told Fox Business that talks are “starting to work out” after he abruptly “shut down talks two days ago.”

Read more: Here’s what you need to know about unemployment benefits eligibility

The White House said the counterproposal sits at $1.6 trillion — though Pelosi said the White House's latest proposal stood at $1.3 trillion, according to CNN’s Manu Raju.

The chances of an overall stimulus package were “slim before and they’re pretty darn close to none now,” Mark Harkins, a former congressional staffer and senior fellow at Georgetown’s Government Affairs Institute, told Yahoo Money.

“The president, unfortunately, for whatever reason, is not telegraphing what he really wants to do,” Harkins said. “He's jumping left, he's jumping right and that makes it very hard to have a negotiation.”

US President Donald Trump listens to Treasury Secretary Steven Mnuchin in the Brady Briefing Room of the White House in Washington, DC, on August 10, 2020. - Secret Service guards shot a person, who was apparently armed, outside the White House on Monday, President Donald Trump said just after being briefly evacuated in the middle of a press conference. The president was abruptly ushered out of the press event and black-clad secret service agents with automatic rifles rushed across the lawn north of the White House. Minutes later, Trump reappeared at the press conference, where journalists had been locked in, and announced that someone had been shot outside the White House grounds. Trump said he knew nothing about the identity or motives of the person shot, but when asked if the person had been armed, answered: "From what I understand, the answer is yes." (Photo by Brendan Smialowski / AFP) (Photo by BRENDAN SMIALOWSKI/AFP via Getty Images)
US President Donald Trump listens to Treasury Secretary Steven Mnuchin in the Brady Briefing Room of the White House in Washington, DC, on August 10, 2020. (Photo by BRENDAN SMIALOWSKI/AFP via Getty Images)

Americans will ‘have to cut spending eventually’

Sticking points for any deal between the White House and Democrats include extra unemployment benefits, funding for schools, aid for state and local governments, child care support, funding for increased testing and tracing, and funding for other appropriations.

Read more: Do you have to pay taxes on unemployment benefits?

After directing his representatives to end the stimulus, Trump took to Twitter on Tuesday evening pushing for standalone stimulus bills in the form of a second round of stimulus checks, $25 billion in relief for airlines, and $135 billion for the Payroll Protection Program (PPP) related to small businesses.

“Deals like this, they require a lot of nuance,” Harkins said. “That's just not where his strengths lie — in the legislative field. He's never been good at that portion.”

A fiscal package in line with major points of agreement between the White House and Democrats would lead to “shorter and faster” recovery with 4 million more jobs added by the end of 2021 and 260,000 more per month, according to Tedeschi’s analysis of an illustrative fiscal package.

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Jobless Americans saw a drop in their unemployment benefits between 52% to 72% after the expiration of the extra $600 in July and the president’s Lost Wages Assistance (LWA) program, according to an analysis by Evercore ISI. (David Foster/Yahoo Finance)

Not passing a stimulus deal will have a double-whammy effect on the job market and spending — fewer jobs will be added while those who remained unemployed will receive fewer unemployment benefits compared to the ones they got under the CARES Act or the LWA.

Unemployed workers faced a cliff at the end of July when the $600 under the CARES Act expired, and a second one with the $300-$400 a week under the LWA program that has now expired in the majority of states. Currently, jobless Americans only get regular state unemployment benefits.

The average regular state unemployment benefit as of August was $323 a week or less than $1,300 a month before tax, with Louisiana at the lowest average of $181 a week or $724 a month before tax, according to data by the Labor Department.

Unemployed workers account for around 15% of retail sales leading to a hit to aggregate retail sales of around 8% and slowing down the recovery in spending, according to Tedeschi.

“They have to make ends meet, they'll have to cut spending eventually,” he said.

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Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.

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